Texas franchise tax payment is a mandatory requirement for almost every business in the state of Texas. While the process of paying franchise tax in Texas is relatively easy and straightforward, you should make sure that you calculate and report your franchise tax accurately. This will help you avoid unnecessary hassle or penalties.

What Is Franchise Tax?

In Texas, all types of businesses other than sole proprietorships are required to pay franchise tax. Franchise tax falls under the category of privilege tax. A privilege tax is a form of tax imposed on businesses that are operating in Texas but headquartered in another state.

Many states require businesses to pay franchise tax as a way to generate revenue. This type of tax is usually based on the net worth of a company, instead of its annual taxable income. Different states may use different methods to calculate franchise tax. If you are doing business in Texas, it is important to know how to calculate, prepare, and pay your franchise tax correctly.

Steps to Paying Franchise Tax in Texas

Determine Whether You Need to Pay Franchise Tax

Before anything else, you need to ascertain if you are subject to franchise tax. Generally, all legal entities that are chartered or conduct business in Texas are required to pay franchise tax. Such entities include:

  • Partnerships, including general, limited, and limited liability partnerships
  • Limited liability companies
  • Corporations
  • Joint ventures
  • Trusts
  • Banks and loan and savings associations
  • Professional and business associations
  • Other entities conducting business in Texas

Also, you need to find out if your business is exempt from franchise tax. You may not be required to pay such tax if your business belongs to one of these categories:

  • Sole proprietorship
  • Certain type of partnership
  • Certain type of trust or entity that is exempt under federal or state tax law

Calculate Your Franchise Tax

To calculate your business' profit margin, find out the total revenue of your company and then deduct one of the following:

  • Cost of goods sold
  • Compensation paid to employees
  • 30 percent of total revenue

Calculate the value for each category separately and then use the one that results in the lowest final figure.

To estimate the amount of franchise tax you need to pay, use the lowest figure obtained from the three subtractions. Businesses that are mainly engaged in retail and wholesale trade are required to pay a franchise tax of 0.375 percent, while others have to pay 0.75 percent. You can use the Texas Comptroller of Public Accounts' online tax calculator to get a more accurate estimation.

Report Your Franchise Tax

After calculating your franchise tax, you have to submit a franchise tax report to the state. This report shows the annualized total revenue of your company and the calculation of the amount of tax you need to pay. It is due by May 15 every year. You can use one of the three following forms:

  • No Tax Due — Use this form if your annualized total revenue does not exceed $1.11 million.
  • E-Z Computation Tax Form — Use this form if your annualized total revenue exceeds $1.1 million.
  • Long Form — Use this form if the other two forms do not apply to your situation.

The next thing you need to do is prepare and submit a public information report. Even if you owe no franchise tax, you must submit this report as long as you are filing a franchise tax report. In addition, you may have to file one or more of these forms:

  • Affiliate Schedule — Required for combined group filings
  • Tiered Partnership Report — Required for tiered partnership filings
  • Common Owner Information Report — Required if you are filing as a certain type of combined group
  • Payment Form — Use this form if you are paying a tax that is not filed electronically

Prepare Your Franchise Tax Report

The Texas Comptroller of Public Accounts has an annual booklet called Franchise Tax Information and Instructions on its website. This booklet provides clear line-by-line instructions for completing your franchise tax report. The Texas Comptroller of Public Accounts allows you to submit and pay your franchise taxes using one of the three following methods:

  • Approved Electronic Submission Software Providers
  • WebFile
  • Downloadable and printable forms for filing by mail

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